IFRS adoption - lessons from the European experience

I’ve been monitoring the adoption of International Financial Reporting Standards (IFRS) for several years now staring with Europe’s transition to IFRS in 2005. However, nowhere is IFRS hotter right now than in the United States. Last year Christopher Cox, the outgoing chairman of the US SEC, published a roadmap for IFRS adoption starting in 2014. Now, after some apparent silence from the SEC, Mary Schapiro has recently indicated that we’ll likely be getting a final decision on adoption in the near future.

The question I’ve been hearing a lot recently from customers (it’s generally assumed that IFRS will be required in the US at some point so it’s just a matter of when) is what do folks need to do to get ready? This is where things get a little tricky. Every organization is different – both from a structural, organizational, and a technology perspective. There’s no “silver bullet” that can turn on IFRS at the flick of a switch - the scope of IFRS is simply too broad.

Interestingly some recent AMR research indicates that organizations in the U.S. are not well prepared for IFRS adoption. Only 9% are implementing now with the vast majority of respondents (63%) yet to define an IFRS strategy or waiting until IFRS deadlines are well articulated.

From the technology perspective, I think we can learn a lot from what already happened in Europe – both good and perhaps less good practice. The timeframe for adoption was very short (far shorter than we might expect in the US) so the vast majority of organizations looked for a quick fix. Typically they decided to leave the transactional and ERP systems well alone and only perform adjustments in the consolidation and reporting layer to provide IFRS specifics as and where needed. This is the approach often referred to as “top-side adjustments”. This allowed companies to meet the initial deadline in the easiest way possible but increased the complexity and cost of reporting in the medium and long term.

In the USA, a lot of folk seem to be focusing their efforts around getting the ERP and General Ledger systems running in parallel to support the expected dual US GAAP / IFRS reporting phase. However I think this approach is incomplete. In order to transition to IFRS all aspects of the financial reporting supply chain need to be considered – from sub and general ledgers all the way through to the group consolidation and reporting systems. The more US GAAP and IFRS data you have at the transactional layer the easier it actually becomes to transition the consolidation and reporting layer and with this approach there should, in theory, be no need for top-side adjustments. However this represents the perfect idyllic world - which for most organizations is still a distant reality. The group reporting layer doesn’t simply exist to enable top-side adjustments - it also provides a comprehensive group reporting mechanism that addresses the IFRS specifics of consolidation methods, reconciliation reports, commentary, report layout, - right through to digital disclosure in the form of XBRL. All of this is remains an essential part of the process irrespective of whether all required US GAAP / IFRS information is readily available in the underlying transactional systems.

So my point here is – organizations should study and learn from the European experience, but resist the temptation to perceive the consolidation and reporting layer purely as the ugly stepsister that at best enables a short term solution via top-side adjustments. Instead, think about how to get the best from all worlds and how each area can make a relevant and lasting contribution to your IFRS strategy. Take a long term view and start focused – perhaps by considering a gradual, phased approach across the entire reporting supply chain.

One thing is clear though – starting the strategy and planning process now will leave time to take a balanced view and avoid the asphyxiating pressure associated with an imminent deadline that feeds short-sighted “tick in the box” solutions. It was the short deadline that resulted in the top-side approach in Europe – something that’s not expected in the U.S.

I recently published a White Paper that discusses some of the technology challenges associated with moving to IFRS, so if this is on your radar and you’d like to discover more, please do check it out.

Small steps to big improvements

So just what is it that makes a successful user of performance management software? Financial performance, market share, efficiency improvements, share value, cost savings…are all viable measures of success. But as we know, a business comprises many parts and key performance measures are often combinations of small successes that build upon each other to deliver a corporate goal. Sometimes it’s also nice to hear about these small successes.

Last week I met with a customer that I haven’t seen for a while to talk about their business and how they were using their performance management system. As we spoke it became clear that they were very happy with the software system and were doing some interesting things that enable them to improve the way they run their business.

My attention peaked when the conversation turned to data integration, a subject close to my heart as it presently the focus of much of my work. I was interested to learn that they were not only integrating data from source systems to their performance management application, but also integrating individual performance management applications - in this instance planning and costing. This was great to hear, because it showed that they had innovated their system usage to draw business advantages from integrated systems, and while they were only exchanging simple data this was already providing tangible business benefits primarily in terms of timeliness and accuracy that would help them make quicker and better decsions. In addition they had saved some time and ultimately cost from what had previously been a manual process. Now of course this is just one small success, in one department of this large organization, but knowing this customer it’s not the only small success. It’s one of many.

As the software industry starts to create business systems that support closed loop performance management this kind of success story will become commonplace and SAP BusinessObjects Financial Information Management is going to be an important part of an EPM deployment for many SAP users. Big or small, we should reflect on our improvements and successes along the way, because it’s in these small steps that we will build a foundation for continuing success.

Deja vu? Almost certainly

I’ve written on this topic many times in recent years and no matter how much progress I think is being made I still find myself with something new to say on the subject, as well as lots of old messages that I feel compelled to keep repeating. No matter what remedies we seem to devise the challenge remains and yet I’m not talking about some kind of embarrassing illness. The fact is the financial close is one of those topics that just won’t go away.

Why is that? Well for one the goal posts keep getting moved. The demands of the market put constant pressure on ever more timely and better quality reporting and regulators are working overtime to introduce new requirements designed to protect stakeholders of all persuasions. And that’s even before we consider the sheer complexity that today’s Financial Controller has to cope with when it comes to producing a set of audited financial statements. So what is the solution? Is there one?

Well there is certainly no silver bullet, no magic blue or red pill or even software solution that can solve all the issues that together form the barriers to a fast and efficient close process (despite what many would have us believe). That said I think we now have enough evidence and enough time has passed for us to come to realize that actually the solution lies in knowing that the challenge can never be solved. This enemy will never truly be beaten…or at least not while I’m still able to write about it.

As I said, the fact is the financial close is one of those topics that just won’t go away and it got me thinking about the last whitepaper I wrote on the subject where our closing argument is about continuous improvement. It’s become clear to me that this is actually the key. While all our thinking about how to approach a fast close project is as sound as ever, and its certainly something that an organization has to do in order to close its books and report in-line with its peers, it’s the steps an organization applies afterwards that will be the key to their continued success and improvement even in the face of an ever changing regulatory landscape.

Any company that has been through a fast close project that followed the methodology we prescribe will have defined a target. They will have looked at their peers in the market and for example have set themselves the goal of a 5 day close process. They will have then examined their close processes, identified the barriers to a fast close in the organization and will have defined an action plan comprising quick wins and big wins to get them to their goal. The key to their ability to maintain this target and perhaps improve further then lies in both continuous and opportunistic improvements and this is achieved by repeating the same approach every time something changes.

Let’s take a case in point, the transition to IFRS in North America or Japan, or perhaps even the adoption of XBRL on a global basis. Now I’m not going to get into the details of how we should tackle these issues here, I’ll leave my fellow blogger Philip Mugglestone to cover that but what’s interesting is that both these changes will impact reporting processes and as a result might have an impact on the speed and efficiency of the close process. So while the patient is on the table, take the time to consider that potential impact. Will it give rise to a new fast close barrier that may not have previously been encountered? What steps need to be taken to not just mitigate the risk but also determine if this wider change creates an opportunity to address something else in the close process that was not possible in the original project?

Of course, every time I’ve shared this opinion recently it then raises the next challenge which is one of cost. Too much regulation and a cost of compliance that is too high. The solution many think is to get compliant as quickly as possible and at the lowest cost possible. Not so in my opinion. If we are to learn from both SOX and the transition to IFRS in Europe an approach which just “ticks the box” will in fact cost more long term.

So what’s my point? Essentially I’m saying that our work is never done and to prove that we only have to look at the Global Close Cycle Rankings from BPM International. This annual research program has 4 years of data on 4^th quarter close process at over 1000 global companies. While there seems to be a trend for general improvement, every year the results show a mix of both improvements some countries and worsening performance in others as companies who had previously improved close times now see them increase. This underlines the need to develop an approach which strives for continuous and opportunistic improvement so not only will a company be able to maintain it close times in the face on an ever more complex environment, but they’ll also reap the benefits of creating a more sustainable close process which will in turn be more adaptable in a changing landscape.

Why peanut butter can be bad for you!

Are your customers profitable ? Whenever I ask this question to business executives the immediate response is always 'Yes'. The comment that typically tends to follow “How can a customer not be profitable? They are purchasing our products and services. They are contributing to our bottom line “

Simply put “Customer Profitability” (CP) is the difference between the revenues earned from and the costs associated with the customer relationship in a specified period. According to the management guru, Philip Kotler, "a profitable customer is a person, household or a company that overtime, yields a revenue stream that exceeds by an acceptable amount the company's cost stream of attracting, selling and servicing the customer".

There is a natural variability of profitability across customers and it is often hard to distinguish the “Profit Creators” from the “Profit Destroyers”. In fact, most organizations are likely to have some customers who do not add to the bottom line, but who they are happy to deal with because they add critical mass to the business or because they are a source of knowledge about the needs of a particular customer segment.


The real challenge in measuring customer profitability is identifying the true costs associated with servicing customers and then accurately assigning those costs across customers. The ERP and Performance Management systems that are typically deployed in companies do an excellent job of identifying the revenue and direct costs associated with each customer. However they fall short of answering the fundamental question of “What is the cost of servicing this customer”. Most companies tend to apportion the overhead costs, almost like spreading peanut butter. They base it on simple metrics like number of transactions, percentage of total cost of sales etc.

Activity Based Costing can be used to answer these tough questions around costing. It can help identify the right amount of indirect expense to assign to a customer based on the amount of each activity they consume. Let us take a look at a simple example where we analyze customer profitability using the apportionment methodology and Activity Based Costing. We have two customers: A and B. If you review the Customer Profit & Loss based on the two methodologies the results are very different.

When using the apportionment method, the overhead costs are apportioned as a percentage of cost of sales. Based on this it looks like Customer B is the profitable customer. When we look at the same Profit & Loss Statement based on Activity Based Costing the case is totally different. Here we have broken down all the costs associated with servicing the customer. Eg: Sales Calls, Shipping, Packaging etc. In reality, Customer B has a very high “Cost to Serve” and is in fact making a loss. This is fairly typical outcome with apportionment tending to overcost simple customers and undercost those with complex requirements and demands.

So without ABC, many organizations are generating totally erroneous reports that can actually lead to managers taking decisions that destroy rather than create value. Not exactly smart - particularly in a downturn. The methodology has been around for 25 years now and it's something that organizations can no longer afford to side step if they want an accurate measurement system for reporting customer profitability.

From Cash to Carbon

After spending many years using costing methodologies to calculate the profitability of products and customers in numerous industries, it's a welcome change to have the opportunity to work with organizations that are adopting the same activity-based methodologies to calculate the carbon emitted across the life cycle of products and services. 

Although there is no legislation yet, there are a number of initiatives across the globe that are driving food and beverage manufacturers and some service providers to start 'eco-labeling' as it's called. This is throwing up some interesting results that will hopefully encourage us to change our behaviour and do our bit to save the planet. 

For instance the Paris Metro now publishes the amount of carbon emitted by each journey on the ticket and compares it with the equivalent journey by car. As the attached image of a ticket shows, a 23 minute by Metro results in 15g of carbon compared with 815g for the same journey in a car. So unless you can get fifty or so people in the car, it's better to take to the tube - or perhaps cycle. (PS I accept no responsibility for any fatalities that may result from cycling in Paris).

Some of the initial calculations done by some food manufacturers are also throwing up some stunning results as well - with the production, supply and consumption of a drink or food often emitting many times its own weight in carbon.

But unlike cost and profitability reporting where the expenses fed into a model can always be reconciled with the assigned costs, carbon labeling is not yet a precise science. This will undoubtedly result in manufacturers of almost identical products coming with with varying results depending on how they have defined the boundaries of their life-cycle assessment and the carbon coefficients used in the calculation. 

Some writers have suggested that this may discredit eco-labeling and confuse consumers. But for me the real issue is not whether comparable products from two different manufacturers show broadly similar amounts of carbon, but a benchmark figure for the amount of carbon emitted by a far more eco-friendly alternative is also shown just as in the Metro ticket above. Only then will consumers have the information they need to make truly informed decisions.